Good day, ladies and gentlemen, and welcome to the Fastenal Company Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call is being recorded. I now like to introduce your host for today's conference, Ellen Treaster of Investor Relations.
Please go ahead, ma'am.
Welcome to the Fastenal Company 2014 Second Quarter Earnings Conference Call. This call will be hosted by Will Overton, our Chief Executive Officer and Dan Flores, our Chief Financial Officer. Also present for today's call is Lee Hine, our President. The call will last for up to 45 minutes. The call will start with a general overview of our quarterly results and operations by Will and Dan with the remainder of the time being open for questions and answers.
Today's conference call is a proprietary Fastenal presentation and is being recorded by Fastenal. No recording, reproduction, transmission or distribution of today's call is permitted without Fastenal's consent. This call is being audio simulcast on the Internet via the Fastenal Investor Relations homepage investor. Fastenal.com. A replay of the webcast will be available on the website until September 1, 2014 at midnight Central Time.
As a reminder, today's conference call includes statements regarding the company's anticipated financial and operating results as well as other forward looking statements based on current expectations as defined by the Private Securities Litigation Reform Act of 1995. Forward looking statements may often be identified with words such as we expect, we anticipate, upcoming or similar indications of future expectations. It is important to note that the company's actual results may differ materially from those anticipated. Information on factors that could cause results to differ materially from these forward looking statements are contained in the company's periodic filings with the Securities and Exchange Commission and we encourage you to review those carefully. Investors are cautioned not to place undue reliance on such forward looking statements as there is no assurance that the matter contained in such statements will occur.
Forward looking statements are made as of today's date only and we undertake no duty to update the information provided on this call. I would now like to turn the call over to Will Overton. Go ahead, Mr. Overton.
Thank you, Ellen, and thank you for everybody who's joining us on the call today. Looking at the Q2 of 2014, I would rate it as a good quarter, not a great quarter, but a good quarter. The most positive numbers being in the sales area. We had 12.1% sales growth for the quarter. Some of the highlights as I see it, our older stores grew right at 10% and even stronger in the last 2 months of the quarter.
So when our store historically when our older stores are growing in the double digit, Fastenal does very well. Our sequential pattern from January to June, which we follow the sequential pattern very closely, was up 14.8% from January to June. Our fastener sequential growth was up 15.1% from January to June and our construction business was up more than 20%. To see those numbers to see numbers similar to that you'd have to go back all the way back to 20 10 where we had similar results and you can see how it came out after that. So from a sales standpoint, we're feeling very good about what we've done.
We believe a lot has to do with us adding the people back at the end of or during 2013 and continuing to be committed to drive more sales calls. On the EPS side, we were somewhat disappointed. We thought we would do a better job or produce higher earnings per share and it's really a margin story. I think Dan did a nice job in the earnings release stating our margin and some of the pressures we're having with larger accounts and things like that. And that we're not going to push the margins so hard internally that we may start or put our people in a position to make bad business decisions.
A couple of things in the margin though that disappointing other than the net result. Freight slipped just a little bit which we have to work on that. That's really about pounding the drum and making sure that we make that work. And some of our measurements on pricing habits slipped slightly. So we're looking at that very hard.
We're working very hard on the margin and believe we'll continue to do well there. On the expense side, we'll continue to do well there. On the expense side, team did a nice job. We grew our SG and A by 10% that was with 15% more FTE. So we added the people.
We got the sales results and produced the sales results and we still maintained our expense level at a very well. So we're happy about that. Vending also on the sales side, our vending performance remains strong. We had good signings. Our sales growth was good.
It's still above 20 percent and we saw improvement in the margin. And we have a tremendous upside on the margin with the Vending. It will take time to do it. But with things we're doing with T Hub and buying better packaging, there are a lot of initiatives going on with vending. And so we're very excited about the vending opportunity and believe it's a big part of our future along with fasteners and many other things.
So to summarize, I'm going to keep my comments short today. To summarize, as I see it, we have very good sales done a very nice job on our expense control and we need to continue to work hard on our margin. So as looking at our business that's what you can expect to from the future is continue to work hard in the sales, work on the margin, manage our expense and hopefully be a very good company for you to own. With that, I'm going to turn it over to Dan who will give you more color on all of the numbers. Thank you.
Thanks, Will and good morning everybody and also thank you for joining us on our call today. I'll just add a few noteworthy points on the patterns and primarily looking at sequential patterns. As Will touched on, since January, our business is up about 15% daily average. And he touched on some of the components and he touched on the fasteners growing with the company. He touched on construction growing faster than the company.
Now my guess is for the analytical folks listening to this, you look at that and saying, yes, but you're comparing to a January that wasn't that impressive, because the weather really dampened it. If you take 4 points, 3 or 4 points out of each of the numbers that Will cited, it's still a number that nobody is coming close to and we haven't come close to since 2010, 2011 timeframe. So we have great momentum going into the second half of the year. And I think that the real impressive part of that is we talked a year ago about we're investing in people at the store. We're investing in selling energy at the store.
That's going to provide us the energy to ramp up our growth. And that's what you're seeing in the year over year numbers, but more importantly that's what you're seeing in the sequential patterns. And I think that's a really strong statement going in. There are some sacrifices that come along the way. And right now one of those sacrifices is a weaker gross margin than we would prefer, with that an industry leading gross margin.
And when you start peeling back, it's really about what's happening in the business more so than what's happening in our habits. Although our habits like anything else in life, we could tweak them and make them a little bit better. And we should have been in the range. There's no question about that. We're less concerned today about the noise in the range and more concerned about what are our patterns with sales growth.
But the sacrifice that comes with the hangover that we have in gross margin, a hangover that I think everybody is aware of that hangover changes dramatically as we transition now from Q2 to Q3 because of what were the dynamics of our gross margin a year ago. And so because of the short term sacrifice, we didn't hit. We get frustrated internally when our incremental margin does not have a 2 at least a 2 in front of it. We are in the mid teens. I believe looking into the second half of the year, we have an incremental 2015 and beyond.
The Will touched on T Hub. Our T Hub facility is ramping up. Like any new business that's taken us some time to work through the pains. Quite a few of the regions have now turned on. I was looking at our picking activity as it relates to T Hub facility and our vending replenishments.
And our picking activity from May to June went up 2.5 times. So 2.5 times is the ramp up and we still have a ton of opportunity. And what comes as that improves is it creates great efficiency at the store level. It helps us on working capital, but it creates great efficiency at the store level because we're picking that product, the replenishment for those machines. That's high frequency product.
We're picking that in a more efficient manner. It also allows us to drive towards product consolidation of what's in T Hub. The efficiency is the win at the store. The gravy on top of that is as we drive consolidation, we improve the gross margin of our vending business, because we're consolidating the brand of SKUs that are going through the machines. Finally, touching on our cash flow.
We I missed one point, sorry. We did announce also in our release that we're closing some stores in the second half of the year. And we've closed a number of stores over the last several years. And like and as we've said in the past, we're always challenging ourselves of looking at our business today based on how we go to market today and say what is the best thing for this local market. Because the key to our success long term is being the best distribution company where we're located.
If that's Eau Claire, Wisconsin, we're the best distribution business in Eau Claire, Wisconsin for serving
the customer's needs there and
serving the growing opportunity of the marketplace. So we announced in the latter half of the year, we're going to close about 45 stores. The way we approach that internally is we reached out to our regional leaders. We have 20 plus regional leaders scattered around North America. And we said to them, hey folks, if you could do a do over, if you could look at your business right now and identify where you want to open stores, because there's still a lot of stores for us to open.
Where you want to open stores, where you would prefer to consolidate some businesses into fewer locations in this market, because it makes more sense for our business today. It makes more sense because of our vending, because of our distribution capabilities, because of all the tools we have in place. What would you do? And they identified 45 stores. So during the Q2, we accrued up some costs for the future leases related to those facilities and we're moving on to our future.
But I think that's a good healthy thing for our organization to do. Touching on the cash flow which is I was getting to a second ago, I'm still proud of all the things we're doing. As a growth company, we produce operating cash as a percentage of earnings that's in the 90s. It was 90 2% in the 1st 6 months of this year. It was 93% in the 1st 6 months of last year.
That's an impressive number when you look at what our growth is doing today versus a year ago at this time, because that takes cash to fund that growth. We continue to invest heavily in both the vending side as well as our distribution infrastructure. And if you look at the numbers we have published in our annual report looking at CapEx for the year and you apply that to our patterns of business, historically our investing activities are just shy of 30% of earnings. Last year we were in the mid-40s, so we invested a lot of cash into the infrastructure of the business. This year, we anticipate being in the mid-30s.
That number is working back down to a more normal number. And we think that infrastructure investments that we've made positions us well for the years to come. With that, I will turn it over to Q and A.
And our first question comes from Holden Lewis from BB and T. Your line is now open. Please go ahead.
Great. Thank you very much. Good morning, guys.
Hey,
Holden. I just sort of wanted to get a sense of on the one hand, you're kind of talking about working hard on sort of the margin. But I think in the transcript, you talked about how you definitely have a sort of a focus now on perhaps more growth than margin. So I'm trying to reconcile in terms of trying to get a sense of when we could start to see margins getting better. How do you reconcile those two comments that caring about margin, but on the other hand really caring about growth perhaps more so than margin at this time?
Well, we care about both of them very what might be very profitable business. So we have to do is from a margin standpoint work more on the mechanical side of it of what the pricing should be versus just standing up and saying, hey, we need to be at 52% or we need to be at 53%. Talk about good decisions, talk about what the opportunities are, talk about how we buy product. And so it's more of a mechanical discussion piece by piece than it is about getting every penny for on every sale. So it's about creating better habits at the store level and building it into the culture.
And as we get there whether that gets us to 51.5% or 52.5%, whatever that is we still want to be able to grow our business at 18% or 15% to 20% plus as we do that. We've done a lot of soul searching on the margin and we found is if we push it too hard, it throws the brakes on sales. I don't know if that helps you. It's a fine line.
Yes. Okay. And then just on the follow-up. Fewest number of heads I think that you added this quarter since Q1 of 2013. Are we sort of seeing one of these plateaus or floors in the headcount adds?
Did you feel like you sort of over added you want to grow into it? Or is it sort of a temporary random noise? How should we think about your strategy going forward?
Our headcount growth goal is to stay at 15% right now on the branch side of it. But last year, we were very flat in the Q2. So we didn't have to add a lot. If you look at it, we ended up right at the number of 15% growth or right Yes. We're north
of 16% at the store. Yes,
I'd say overall. So at the store, we're above our number. But we'll continue to add through the Q3 the adds won't be real great because we didn't add again a lot last year. As Q4 comes that number will start to have we've been working very hard with our regionals. We had them all in this week talking about folks hit your numbers.
We're not going to give you exact headcounts. Run your businesses like CEOs. And when you have 20 of them doing that, there's a little fluctuation in the numbers. Some will be ahead and some will be behind. But overall, our goal is to add about 15% to our stores.
Only thing I'll add to that is back in both our January and April call, we did talk about that that we wanted to end the year in that 15% neighborhood and we were slowing down. We weren't pushing as hard on the ads, because we're also very conscious of the fact that we want to manage our operating expenses through all this. We want to invest for growth, manage our operating expenses and I think that's what you saw in the quarter.
Okay. Thank you, guys.
Thank you. And our next question comes from Sam Darkatsh from Raymond James. Your line is now open. Please go ahead.
Good morning. This is Josh filling in for Sam. Thanks for taking my questions.
Hey, Josh.
In light of the store closings coming in the second half, could you give us an update on the potential number of stores you think you could have in the U. S. Or North America like what the potential store count could be years down the road?
Our published number has always been around 3,500. As far as what we've talked about internally and externally and we don't frankly know if that number is right or wrong. What we do know is the market opportunity, depending on whose set of numbers you're going to look at, is maybe it's $160,000,000,000 maybe it's $140,000,000 maybe it's $110,000,000 At $3,500,000,000 we have a tremendous opportunity to go out and take market share for years into the future. I'm 50 years old. I'm confident when I'm long gone from being around here, this organization will be growing.
Maybe at that point in time, a good chunk of that growth is coming from outside of North America. Who knows? It depends on how successful we are in the next 10, 15 years. But it's really about what's the opportunity. I don't know how many stores we'll have.
I don't know how many vending machines we'll have. I don't know how many bin stock programs we'll have. I know that we'll be doing business with more customers in more locations, doing more dollars. And I look forward to seeing how that evolves. But our stated number right now is 3,500.
And we it's a little bit of a napkin calculation, but we think it's a reasonable way
to look at the future. We're also spending time trying to understand the changing customer habits with Internet, with more traffic, with where people want to travel. And that's going to determine a lot of where that number eventually falls, what the customers expect out of us as a distributor or supplier.
Thanks for the color. And then specifically on the pickup in fastener growth, could you discuss in a little bit more detail what was driving that? And especially what the whether pricing was positive or negative?
Pricing is pretty neutral. If anything, it's challenging because one thing you have to keep in perspective, if you look at the economic improvements we've had, which have been meager over the last 5 years. But if you look at them, they're heavily skewed to larger companies than they are to smaller companies. At least that's my perception when I read in the paper, what I see in the media, what I see in connections I have with friends in my hometown of that own businesses that employ anywhere from 5 to 25 employees or 50 employees of where the recovery is albeit meager has been achieved. The other thing as it relates to our Faster business, we talked a bit about about 20% of our business today is heavy equipment manufacturing.
And that pummeled us in 2013. In 2012, we were seeing very attractive growth in that business. As we went through 2013, that growth weakened. We bottomed out in the Q3 with low single digits growth. We had a month there where we actually went slightly negative.
And the only growth that we were seeing in the months around it were the fact we were adding market share, but our core business was down. That business has been improving as we've entered into 2014. We saw mid kind of mid single digit growth in that business in the 1st quarter. That improved a few percentage points in the second quarter. We were at about 8% to growth in that business.
And from a sequential pattern, that's given legs to our faster business as well.
Thank you. I'll get back in queue.
Our next question comes from Adam Uhlman from Cleveland Research. Your line is now open. Please go ahead.
Hi, guys. Good morning. Good morning, Adam.
Hey, Adam.
Just to clarify, Dana, you mentioned earlier that incremental margins. Do you think you could still hit that mid to high 20% that we were talking about a couple of months ago? Well, if I look out the Q4, I'm very comfortable with that because that the hangover is gone in gross margin. The wildcard for Q3 is top line and gross margin. Coming into the quarter, I personally would be disappointed and this is a dangerous place for me to go, but since you asked the question, I personally would be disappointed if there's not a 2 in front of our incremental margin.
And I don't think I'm going on a limb with that comment, because when you look at where our expectations are and where our expectations should be. And that's the we just had all of our regional leaders in on Wednesday Thursday of this week and those are discussions we had with them. And I believe the selling momentum we have in the business lends itself to having that type of belief in the future and I don't think I'm smoking something and saying it. Okay. Got you.
And then unrelated to that percent of sales to vending customers felt for the first time, I think ever, what exactly assessing our stores and our stores that we have today, we assessing our stores and our stores that we have today. We have a business that's gone from 0 to $350,000,000 $400,000,000 in sales annual run rate plus in a handful of years. And in 2012 2013, we signed a tremendous amount of vending machines. As we become smarter about the business, we see vending machines that are performing unbelievably. We see vending machines that are performing damn well, excuse my choice of words.
We see vending machines that are disappointing. And we take a good hard look at them and we've pulled some machines out. And when we pull up the way we report the number is we count if we have a customer that has 30 locations that we sell to and we have vending in 20 of those, we only count the business in those 20 when we're reporting our numbers. So if we pull any machines out of one location and we scratch our head and say, this location just doesn't have enough employees, we're going to pull it out of this one. That can that might be a location that spends a fair amount of dollars on something, but the vending machine didn't make sense and it pulled out a little bit.
To me the number that really matters is the 21% or 22% growth with the customers that have vending, because that's what's going to drive our business long term. The other thing you have to keep in perspective, some of the things that are raising our numbers right now, improving our growth, the 15 percent faster improvement, the 20% construction. Some of those customers don't have vending yet.
A lot.
And so one thing that's happening, we pulled some machines up. What was really happening is the tide is rising. Better business mix. Yes. But essentially you look at 37 or 38, it's a little bit of noise.
Got you. Thank you.
And our next question comes from Robert Barry from Susquehanna. Your line is now open. Please go ahead.
Hey, guys. Good morning.
Good morning, Rob. I
had a question a follow-up question on the gross margin outlook. So in the release, you alluded to it being near or just below the low end of the range for the short term. I'm curious what gives you confidence this pressure on the gross margin will only be a short term phenomenon?
Well, the real reason I put it in there to be honest with you, you guys wore me out in the last 3 months. The number of questions I got about we're going to be here, be here, it almost wore me out. And it's really more of a statement to everybody, hey, let's manage growing business. We're going to work really hard on the gross margin. There's a whole bunch of things mechanically that I can look at that we're doing today, tomorrow, next week.
I touched on a few of them with T Hub that we're doing to structurally improve the gross margin. But Will mentioned it earlier, what we don't want to do is blare the music darn loud that we have a store somewhere in Fastenal tomorrow that turns down a 28% margin sale or a 22% margin sale because of the noise they heard from us. And we want to say to them grow your business and grow it properly. One thing Bob Kerlin taught us years ago that we can never forget, at the end of the day, it's about returns. At the end of the day, it's about your operating margin.
Are you generating cash to support your growth and returns to the business? And if you do that every day and you service your customer well, you will grow your business and you
will build a better business tomorrow than you have today. I think also staying on what we learned from Bob is that the biggest factor we believe in margin isn't markets and isn't products, it's pay programs. And I've been saying that for a long time when we are all fasteners, we are margins at 52%. We're now 40% fasteners. Our margin is at 51.8%.
So not a lot of variance over years excuse me, 50.8%. So it has not moved a lot. And we have the pay programs in place to motivate these people to make the good decisions. And those decisions just aren't all about margin. They're about growth versus margin.
And that's what we want to let that work. But we haven't lowered our programs to allow lower margins and pay it. So I think that the systems are in place at the store level, at the district, at the regional and at the top level. And that's why I have confidence that the margin is not going to move a lot going down that we'll keep our hand out.
And to be honest, I'd rather report 2nd quarter with 12% growth and 50.8% gross margin than 8% growth and we're at 51.8%.
Yes. I mean, I guess it all normalizes out on the earnings line, right? And I think that there's a big picture concern that it's becoming more expensive to grow in Industrial Distribution. And so I guess the follow-up question is if you want to shift the conversation to operating margin that's fine or even earnings growth, help us see how you get back to your target growth range of 15% to 20% without it costing so much that you're not really seeing as much or greater leverage on the earnings line?
We grew our expense at 10%. So we had leverage on the growth. Our problem wasn't the sales growth versus expense. Our problem is we had a tough margin comparison from last year. So if we roll it forward, we maintain our margin in the 51% range.
Hopefully, we'll move it up. I'm not giving guidance. I'm saying we should we will have earnings leverage. So we're controlling our expenses well. We have great sales momentum.
Again, we're up 14% from January. And so we think we're in a good spot. It's we just have to continue to do well.
Okay. Thank you.
And our next question comes from Ryan Merkel from William Blair. Your line is now open. Please go ahead.
Thanks. First question on Pathway to Profit. I noticed you changed the 23% EBIT margin target. You're now needing $110,000 per month
for the average store from $100,000 Just wondering
if you can expand on that a bit.
Yes. The language we had in there was the range of $100,000 to $110,000 We're basically at $100,000 average store this quarter. And our gross margin slipped at 50.8, we need to be closer to 110 to hit 23. Okay. At 51.5 that'd be a different discussion.
Right.
Okay. And then on vending,
what is the average gross margin today on those products? And where do you think it could go? Is 50% achievable at some point? Or is that too optimistic?
If I look at our vending where it's running right now, a few years ago when we were talking about vending and a lot of questions about the weaker gross margins in it. And we take a step back and say, woah, woah, woah, woah. The customers that have vending are larger customers and their gross margin is around X. And our gross margin in vending is very much in line. And when we look at our customers before vending and after vending, the gross margins didn't really change.
And they were in that neighborhood of 40%. If you look at our vending today, we've improved it meaningfully from where it was 2 years ago. And if we hadn't, we would have more drag from it because it's roughly 12% of our sales right now vending, 12% to 13%.
I don't have the
exact number in front of me.
North of 13%.
North of 13%. And so and we've moved that margin up more in that 43.5% to 44% range. And right now, if I look at the concentrations of products going through vending and that's where I touched on the T Hub comment earlier. Our concentrating effect isn't that strong yet. And so I really see no reason why and that the gross margin in our vending can't normalize to the gross margin of the company allowing for the products.
And what I mean by that is, our faster gross margins aren't 51%. Our non fastener margins aren't 51%. Fasteners are above that number. Non fasteners are a little bit below that number. But there's plenty of room for us to improve gross margin over time.
And it's really about being smarter about the products that go into a machine, a machine that we know a lot more about today than we did 2 years ago and that's why our margin has improved by 3.5 points.
Right. And I would assume private label more than the machines is only going to help as well.
It's private label, it's brands. It's really about the scale and efficiency that comes from if I can say to my supplier, we'd like to buy this product and we're selling so many of this product, whether it's
a private label or a brand, we're selling
so much of this through our vending machines. A private label or a brand.
We're selling so much of this through our vending machines that we want to buy it this way. It's not even pallet pricing, it's container pricing. We're going to buy it this way. We're going to bring
it in the T Hub and we're going to put pricing. We're going to buy it this way, we're going to bring it in the T Hub and we're going to push it out through our machines. It allows you to source so much better and the margin improves. And it isn't just because you're putting your brands in, it's because you're putting you're aggregating the business. And you're improving the economics of the business and you're improving the labor efficiency at the store unbelievably.
And it gives you more selling energy.
I am still completely convinced looking at the numbers that vending will be our most efficient and most profitable business over a long period, not in a very shortly, but for a long period of time. For years to come because of all the things we've built in. And in the Q2 for the first time, we're at a run rate to actually be over $500,000,000 going through the machines. So it's become a big business and that's growing well above the company. So if we continue any even similar growth rates, our profit picture for the future looks great.
Thank you.
Our next question comes from Eli Lusgaardian from Longbow Securities. Your line is now open. Please go ahead.
Thank you very much. Good morning, everyone. Good morning. I hate to go back to the margin question, which is really the focus of the
clients. We've heard it before, Eli. Come on.
I know. But you articulate a stronger incremental in the second half. The mix is sort of trending a little bit better. You're controlling expenses a slower add. So the question becomes why are gross margins hanging around the same level and so as you look out?
And there's got to be something else affecting it whether it's lack of supplier rebates or changes or something else is affecting the market that you shouldn't show some leverage from 50.8% that's meaningful per se versus last year based on the current trends. So can you help me get some idea of why we're at the same levels?
We're not saying we're not. What we're saying is, if our growth like I said, and part of my commentary is the focus, the spotlight of every question that comes in is about gross margin here, here or there. And we're not going to jump out the window. If we report a quarter with 51% or 50.9% or 51.1% gross margin, We're seeing a tremendous amount of growth in our business right now from non fasteners. We're seeing improvements in fasteners.
We see great trends in fasteners. But the year over numbers are what they are. And it's disproportionate to large account business. If the small customer was growing as fast with us and we had that mix in our numbers, we are being challenged by mix in a massive way. All these things that are under the hood that we talk about the vending the improvements in vending vending the improvements in vending gross margin, the improvements in our sourcing, the things we do every day, the improvements over the years in our freight.
All these things are structural changes we're making to combat the massive change in customer and product mix that's occurring in our business. When I joined Fastenal in 1996, 4% of our business was national account. Today, it's 44%. If I add large regional accounts, more than 50% of our business today is a large multi location customer. When I joined Fastenal in 1996, I think at that time fasteners were about 80%, 85% of our business.
Today they've dropped in half to the low 40s. But during that time frame, we've managed all the structural components within the respective product categories and end market categories. And we've basically had a gross margin that's been unchanged. There's been periods of turmoil, but hell you have a business that goes from $220,000,000 a year to $3,500,000,000 a year in 17 years?
That comes to the territory. Here's our internal thinking on it. If we add a point of growth to our business where we are right now, it adds just about $10,000,000 in quarterly revenue and $5,000,000 in gross margin. If we give up 20 basis points, which everybody is freaked out about, we give up $2,000,000 So do I want the point of growth or do I want the 20 basis points? I'd like them both.
But on balance, a point or 2 of growth is worth a lot of margin. And we have to find that balance within our company and keep the Street in the know at the same time or keep Dan's checking his calculator here, see if
I got it right. No. No. No.
I do have it right. So over $1,000,000,000 you get a point of growth you pick up $10,000,000 And so that's trying to find that balance. What do you get the return on? The extra $5,000,000 in gross margin.
All right. Thank you. And one follow-up question on a completely different topic. One of the things I'm surprised I don't hear much is that the company has undertaken sort of a metalworking initiative, more venture into cutting tools. I know you have to deal with Kennametal.
So we're not hearing very much about what's going on in that business, how it's growing, whether or not it's still a main focus and cutting tools go right through vending machines, it would add a lot to margins too at the same time. So can you give us an idea of should I not expect much in the next couple of years? Or is that a real focus area outside of what the
other initiatives?
We're continuing to work very hard on the metalworking. It's continuing to outgrow the overall company revenue, not by the amount that we had expected, but we're growing well above what we see our public peers that are working in that area. Our metal working sales are growing well above anyone else that we can get public data on. We've just we haven't been talking as much about the different product lines. What Dan and I have learned over a long period of time is the more we talk about it, the more we have to support it.
And it's easier for us to give more general information, continue to work hard on the macro numbers, growth, margin, headcount. And when people ask, we do talk about so we're very excited about the metalworking opportunity just as we are about fasteners, safety, vending and many other areas.
All right. Thank you very much.
And our next question comes from David Manthey from Robert W. Baird. Your line is now open. Please go ahead.
Thanks. Hi, guys. Good morning. Good morning. First off, Dan, you mentioned there's a lot of things that you've got going on.
I think you called them mechanical factors that will structurally improve gross margin. I mean not to dwell on this too much, but could you just tick off a few examples of those things just so we can have a laundry list? Sure.
The first one is what we touched on with T Hub. The consolidate the aggregation of our spend, whether that's going to one of our brands that we support in our T Hub facility or private label that we support in our T Hub facility. It's identifying all the opportunities we have and communicating that to the field and communicating that to our district managers and our regional leaders of here's the gross margin opportunity for this, this and this. And then we're always doing that for the business in total, but there's tremendous opportunity. I always think of the vending machine as an end cap, if you want to use a retail analogy.
And on the end cap as a retailer, you have a lot of choice about what goes on to that end cap. We have a lot of influence on what goes into the vending machine. We need to exercise that influence. And we need to go to our customer every day with cost savings ideas and this is one them. We can you can do a sharing, a gain sharing component of that and it's a win win scenario for our customer, for our business and for our suppliers.
And so because it's a more efficient supply chain. The freight one is another component of that that we always talk about. And then a third one is being really good on the sourcing side at the store and at the company level on commodity pieces, the branded pieces and challenging our self on the exclusive brand piece. And again, that relates to our business every day. And I challenge our product managers and our sourcing folks on that every day about what we're stocking in the store, about how we're sourcing, how we're expanding our capability to source and how we're helping our stores do
a better job too. David, I would throw in a 4th there and that is the education of our stores to charge for the value that they provide their customers. That is I know that's an inexperienced people. As they gain experience and they gain confidence things will change. But that goes right back to the habits of pricing a customer or a sale appropriately.
And we that is an ongoing item for us too.
As long as we have a list, I'll throw
in a 5th. There you go.
And that is that Lee has promoted a gentleman to work for him working on pricing. But what he's really working on is trying to identify the current systems that are available software trends and study the science of pricing and understanding the opportunity of the products we sell into the market. And we've always been pretty good at that, but we think there's upside. So he's it's really that is really more focused on larger customers understanding what the needs are. And so all these things put together give us some help.
And at the same time, everyone's pushing you for the other direction. So it's going to be a tug of war forever. We just hope to win a little more on the rope.
Right. Okay. And then just to follow-up, dragging that down the P and L to where it matters at the EBIT line, historically, your change in EBIT divided by change in GP dollars has been, let's call it, around 50%. And I guess the theory is that if let's say your customers are getting bigger, the mix is changing and so forth, but the cost to serve goes down, Should that number not be as good or maybe even better than it has been historically, meaning you get better leverage on your cost structure because the cost to serve these bigger customers is lower?
That's really inherent in Pathway to Profit. That's kind of what we identified, bigger customers, bigger stores, lower cost to serve. It's about volume. Yes. And we see we have lots of data points with the number of stores we have and we can see where it is.
And as long as we continue to grow our average store size this quarter is difficult because we had tremendous drop in the margin. I mean at 140 basis points everything looks skewed in the wrong direction. But in a more normal quarter you would have seen that come through.
Yes. Okay. All right. Thanks very much.
Thanks, Dave.
And that is all the time we have for questions. I would like to turn the call back to Will and Dan.
Once again, I want to thank you for your continued interest in Fastenal. Hopefully, the combination of our earnings release and the commentary on this call helps you understand our business and how we're working to grow the business into the future. So thank you and have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone